chapter 12 Flashcards
preferred stock
par value
callable preferred stock
preferred stock: less available, more costly, pay dividends before common stock, take precedence if company is liquidated.
par value: face value of security
- dividend is a % of par value
callable preferred stock: when the stock is called back by the company, they want to buy it back and give you your money back
The most popular stock in America:
the company’s stock the investor works for
the value of common stock increases in 4 ways:
- dollar appreciation of stock value
- stock splits
- mergers (may increase or decrease)
- income from dividends
4 main types of preferred stocks:
- cumulative: if dividends are passed they accumulate and are paid next quarter. (most common)
- participating: (rare), entitles holder to above and beyond the declared dividend
- adjustable-rate: pays dividend that is adjustable, quarterly, based on changes in market rate
- convertible: exchangeable for given # of common stock
what is the main difference between common stock and preferred stock?
preferred stock always pays a dividend whereas common stock may or may not, and preferred stock takes precedence over common stock when paying dividends or if the company is liquidated
Different categories of stock:
blue chip: nationally known companies, stable, long records of profit growth (AT&T, McDonalds, GE, etc)
cyclical stock: stock following business cycle (automakers, chemical companies, homebuilders)
defensive stock: remains stable with constistent dividends regardless of economy- they hold their value even when the econ. is weak (basic everyday goods/necessicities)
growth stock: young companies with expanding products
income stock: high current dividends, not worried about selling price. (utilities, gas, telephone, etc)
speculative stock: risky, newer stocks, with anticipation of gain and possible loss (usually VERY new companies)
The only stock on both the original and current Dow Jones list is…
General Electric
examples of stock by classification
aerospace automotive banks chemicals consumer goods food manufacturing telecommunications
stock indicators
Dow Jones Industrial Average: 30 daily leading stock, most reported
S&P: Standard and Poor: 500 stock listings
NASDAQ index: virtual indicator of various stock, smaller, newer, technology companies
Russell 2000 index: based on what the company is worth
Willshire 5000 equity: broader indicator of the market
Bull Market vs. Bear Market
bull market = market is up and good
bear market = market is down
what company is the issuer of common stock?
New York Stock Exchange
4 numerical measures of stock:
book value
earnings per share
Price Earnings ratio (PE)
Beta coefficient
book value
company net worth (asset-liability) / shares of common stock
earnings per share
profits of company compared to # of shares
Price Earnings ratio
price of stock: earnings of company
low PE: 5-20 = stable, valuable, lower risk
high PE: 25 or higher = less stable, higher risk, may be newer company… may lead to large growth
Beta coefficient
relationship between price of 1 share of stock and the annual earnings of the company
reflects the volatility of the company
- low beta = low risk, conservative
- high beta = high risk, aggressive
What are the 3 investment theories?
Efficient market theory (random walk theory): CANNOT predict changes in market, use other methods to chose stock
Fundamental Theory: projections of Future earnings. works in high growth stock and new product development
Technical theory: WHOLE economy, overall patterns and trends
primary market stocks
secondary market stocks
primary: very 1st time buying stock (no one has previously owned)
secondary: been previously bought and sold
securities exchange
over the counter market (OTC)
securities exchange: location where stocks are exchanged
OTC: another form of stock exchange for those stocks not listed on securities and exchange
- usually small beginning stock
Steps in a typical stock exchange transaction
- chose 1 or 2 stock, do your research and observe patterns
- place market order
- determine long term and short term strategies
limit order stop order discretionary order round lots odd lots
limit order: place limit on the amount to buy a share
stop order: price at which you wish to sell the stock
discretionary order: entrust that the stockbroker will determine when to buy and sell
round lots: integers of 100 (typically cheaper if bought this way)
odd lots: any other number of shares
long term investment strategies
buy and hold
dollar cost averaging
dividend reinvestment plan
direct investment plan
short term investment strategies
buying stock on margin: betting that capital gain will be greater than amount borrowed to buy stock
selling short: sell stock, to pay back borrowed money
option
call
put
option: agreement to buy/sell stock
call: ability of the company to request pay-up/ purchase at that time
put: right to sell
